CMHC insurance vs down payment

[Panda]

Hi Guys,

I have a question regarding CMHC insurance. If someone has only 10% downpayment on a $400k house, is it worth to pay for CMHC insurance or is it a better idea to BORROW additional funds to make the 20% downpayment. Interest rate on the borrowed funds would be prime+1%.

Any and all advice will be appreciated. Thanks.

 

[daveto]

Hi Guys,

I have a question regarding CMHC insurance. If someone has only 10% downpayment on a $400k house, is it worth to pay for CMHC insurance or is it a better idea to BORROW additional funds to make the 20% downpayment. Interest rate on the borrowed funds would be prime+1%.

Any and all advice will be appreciated. Thanks.

Gee whiz! You don't know how to use google? You don't know how to do math?

Ok...I'll do it for you...
http://www.cmhc-schl.gc.ca/en/co/moloin/moloin_005.cfm

So as a non-self employed, and with a 25yr amortization, the insurance is 2%.
2% x $360k=$7.2k
added to your mortgage, and amortized at the same rate

In contrast, you can borrow your $40k, and then pay the prime+1% which immediately saves you the $7.2k.

However, if your original mortgage application did not include this $40k loan, then you should advise your mortgage lender as they won't be very happy if they find out you misrepresented your debt load.

 

[Therion]

Unless your payment to income ratio is quite good, your mortgage co. will be very unhappy if you borrow $40k to put towards the downpayment. Now if they don't mind, and you can pay back the loan within a couple of years, it might be worth it depending on the interest rate. If it's a straight loan, you won't get less than 6% interest, but even then you will only pay about $3800 in interest (assuming you pay it back in 3 years). This would assume monthly payments of over $1200.

A more reasonable $500 a month at 8% interest will see you pay almost $20,000 in interest and it will take about 10 years. So it basically depends on how good your credit is (which will determine your interest rate), and how much cashflow you have to put into the loan.

Edit: daveto: where can you borrow at prime + 1%? That's the going variable rate mortgage, and no one will give you that for a downpayment unless the lender isn't also carrying the mortgage.

 

[rbt]

Edit: daveto: where can you borrow at prime + 1%?

Secured loan?

 

[cdr108]

I haven't touched my unsecured LOC ... what's the usual going rate for those?

 

[daveto]

Edit: daveto: where can you borrow at prime + 1%? That's the going variable rate mortgage, and no one will give you that for a downpayment unless the lender isn't also carrying the mortgage.

I dunno. I just quoted the rate that panda quoted in the original post.

 

[Panda]

Gee whiz! You don't know how to use google? You don't know how to do math?

.

I was expecting more in-depth analysis (e.g. interest paid over the loan term vs saving the interest payment on (lower) mortgage etc)

I wonder if the banks consider you a better-value customer if you have at least 20% equity. I know they offer home equity line of credit if you have more than 20% equity. Is it worth it?

 

[Panda]

Unless your payment to income ratio is quite good, your mortgage co. will be very unhappy if you borrow $40k to put towards the downpayment.

Thanks Therion, for these analyses. It's quiet helpful.

 

[daveto]

I was expecting more in-depth analysis (e.g. interest paid over the loan term vs saving the interest payment on (lower) mortgage etc)

I regret that I did not meet your expectations.